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Drillers snapping up rights leases in Ohio

View SlideshowRequest to buy this photoKyle Robertson | DispatchGas- and oil-company representatives flood the Harrison County recorder’s office to look up land records seeking parcels to lease for drilling.

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CADIZ, Ohio — The Harrison County recorder’s office here used to be a quiet spot to research deeds, leases and other property documents that date to 1813.

Now, dozens of people clog the office every day and set up camp in the courthouse hallways to comb through documents that show who owns property in the eastern Ohio county.

These men and women work for competing energy companies that are racing to secure drilling rights to the oil and gas in Ohio’s Utica and Marcellus shale.

“I’m told that, even back in the coal days of the 1950s and 1960s, it was never as busy as this,” said Tracy Boyer, county recorder since 1993.

While state regulators, industry officials and environmental advocates debate the benefits and pitfalls of horizontal shale-gas drilling and hydraulic fracturing, or “fracking,” the work to create Ohio’s shale-gas boom is going on in county offices across the state.

And it’s happening on doorsteps and at kitchen tables in rural houses, where landowners are entertaining lease offers from gas-company representatives.

Rumors of rich payouts creating overnight millionaires are rampant. Some of them are even true.

And while many landowners are weighing their options, others are learning that they don’t have any. Decades-old leases may still apply today, even if the current property owners didn’t sign them.

Hundreds of landowners in Holmes, Wayne and Ashland counties, for example, discovered that Columbia Gas had subleased more than 40,200 acres of mineral rights to two drilling companies in January 2009.

“We don’t know the people who signed it. It just came with the property,” Ann Obrecht, a Wayne County commissioner and one of those landowners, said of one lease.

Some leases can trap landowners into deals that leave them little or no recourse if drilling damages their property, drains or taints their water, spoils their farm fields or contaminates the air.

Meetings are being held across the state to teach farmers and other property owners about these potential problems. “When you get a standard boilerplate lease, you need to start asking some questions,” said Dale Arnold, energy-policy director for the Ohio Farm Bureau Federation, during a Sept. 7 landowners meeting in Mansfield.

How leases work

A mineral-rights lease is the heart of a legally binding partnership between landowners and oil and gas companies.

Property owners typically are offered a bonus payment that promises a certain amount of money per acre and royalties that pay a percentage of the value of oil or gas that comes out of the ground.

Leases typically give companies a four- to five-year deadline to drill. If a well is drilled, the lease stays in effect for as long as that well produces natural gas or oil.

The amount of money a landowner is offered in bonus payments isn’t recorded in the leases. Before the first commercially successful shale-gas well was drilled in Washington County, Pa., in 2005, the going rate was as much as $100 an acre.

Now, some landowners are securing bonuses that are 20 times that amount.

Boots on the ground

Oklahoma-based Chesapeake Energy has about 600 workers poring over land records in county offices across Ohio, said Lester Zitkus, the company’s vice president of land.

He said the records help identify parcels that can be leased and show the companies whether recently signed leases can be contested or invalidated by old leases, some of which date back more than a century.

In July, Chesapeake officials estimated that the company has spent between $1.5 billion and $2 billion to acquire the rights to 1.25 million acres in Ohio. The company estimated the value of the gas, butane, propane and oil covered by those leases at $15 billion to $20 billion.

New York-based Hess Corp. reportedly paid more than $1.3 billion this month to gain drilling rights to more than 180,000 acres in eastern Ohio.

“We are building a strategic acreage position in the Ohio Utica shale,” CEO John Hess said in a statement. “We’ve got to drill, and it’s early, but we think it offers a lot of potential for growth.”

Big payouts

The competition for shale has reportedly driven bonus payments to new levels. Rumors of $2,000-an-acre payments have given way to rumors of $3,000-an-acre payments and more.

“In Carroll County, I’ve heard the landowners group there got $3,300 an acre,” said Steve Rhodes, who owns a farm near Shelby.

Rhodes is secretary of a group of landowners in northern Richland County who formed an alliance to sign the best leasing deal.

“We’ve got 117 members and 17,500 acres involved,” he said.

Jefferson County lawyer and farmer Larry Piergallini said he helped form a group of about 200 landowners who attracted bids from four energy companies that wanted to lease their shared 20,000 acres.

He said the winning bid included a bonus payment of $3,700 an acre. That would mean the 604-acre Piergallini family farm was promised a payout of $2,234,800.

Texas-based Marquette Exploration paid that amount and an additional $70 million to the other landowners. The company and its leases were sold to Hess for $750 million.

Handcuffed by old leases

Other landowners are finding that old but active leases can mean that companies can drill wells on their land or sell the rights to other energy companies.

The companies are not required to negotiate new deals, offer bonus payments or increase royalties.

When landowners in Ashland, Coshocton, Holmes, Knox, Richland and Wayne counties banded together to form the Mohican Basin Landowners Association, many found that existing leases held by Columbia Gas had been subleased to Houston-based EnerVest and to Denver-based Anschutz Exploration Corp.

Columbia Gas doesn’t operate gas wells in the area. It leases the land for gas storage. In these areas, natural gas is pumped from pipelines into old gas wells and kept underground until it’s needed to heat homes. The sublease agreement gives EnerVest and Anschutz shared rights to drill through the storage reservoirs for gas and oil.

On July, 1, 2010, Anschutz sold its share of the 40,200 acres to Chesapeake Energy, according to records in the Wayne County recorder’s office.

The sale amount and the split of the acreage were not disclosed in the records.

EnerVest spokesman Ron Whitmire said his company still controls about 13,000 acres. He and Zitkus said their companies have no immediate plans to drill in that area.

Still, Obrecht and other Mohican landowners say they are concerned that the leases give the companies too much freedom to decide when and where to set up horizontal drilling rigs on their properties.

“I can’t find anything (in the lease) that says how close they can come to my residence,” said Marilyn Byers, who owns a 72-acre cattle farm just north of Loudonville.

“There is nothing to protect our drinking water because we all have wells.”

Obrecht also is worried about her family’s 300-acre dairy farm in Wayne County. She said her family had no idea the lease could be used for anything but gas storage when they bought the farm in 1974.

“It’s not just the drilling unit, but the roads they put in to get to them,” Obrecht said. “Is it a good company? Do we know them?”

In a statement, Columbia Gas Transmission officials said subleasing mineral rights is nothing new and that landowners are still entitled to royalty payments for extracted gas.

Whitmire said EnerVest is focused on developing wells in eastern Ohio and doesn’t know when it might turn its attention west toward Wayne and Holmes counties.

Zitkus said some of the leases might not allow for the horizontal drilling that Chesapeake would need to do. As a result, the company might have to negotiate new terms with the landowners.

J. Richard Emens, a Columbus-based oil and gas lawyer hired by the Mohican group to investigate the gas-storage matter, said he is eager to work out a deal for his clients.

“They don’t believe this (lease) is fair,” Emens said. “Let’s just say the landowners group is looking forward to having more-meaningful discussions.”

Read the fine print

Emens and other oil and gas experts said landowners need to take their time before signing leases.

He said he has identified a number of provisions that keep leases from expiring, even if there is no drilling within five years.

Other provisions, he said, could give drilling companies free access to water on the land or allow them to build pipelines and other equipment on land even if they don’t drill a well.

“Just because they are told this is a standard lease and they should sign it as is, that should not persuade landowners to give up their negotiation rights,” Emens said.

Arnold, of the farm bureau, said landowners also should make sure that leases protect them from any pollution and that they should have their soil and water tested before drilling occurs.

That way, he said, farmers will be better able to show that drilling caused any pollution.

Arnold also said farmers should record their crop production per acre each year.

And landowners should demand that leases include measures that would force drilling companies to clean up any pollution, fix problems and compensate them for damages.

“That lease is under your control up until you sign it,” Arnold said.

Mandatory inclusion

Despite the lure of bonuses and royalties, some Ohio landowners might never want to sign a drilling lease.

Then again, it might not matter.

A statute known as the mandatory-pooling law could force some holdouts to open up their land.

Before a horizontal well can be drilled in Ohio, energy companies must acquire at least 144 acres of mineral rights. That often means acquiring leases from many landowners.

Mike McCormac, oil and gas permitting manager for the Ohio Department of Natural Resources, said the state typically requires energy companies to acquire at least 90 percent of the mineral rights they intend to tap. Under the mandatory-pooling law, those who own the remaining 10 percent could be forced to participate.

McCormac said energy companies could not place drilling rigs, wells, roads, pipelines or other equipment on that 10 percent.

They could, however, drill horizontally beneath the land.

Zitkus said Chesapeake is committed to dealing openly and fairly with landowners.

“We plan to be here a long time. We’re not out to dupe people or flip these leases and give them to someone else,” he said. “We do strongly advocate a transparent leasing process.”